Raffles Medical – DBS

Strong pick up in patient load

4Q net profit exceeded our expectation on pick up in patient load and margins expansion

Potential special dividends on high net cash level (c.S$90m/17.3Scents) by FYE10F

Raise earnings by 17%/24%; CAGR of 21%

Upgrade to Buy, TP raised to S$1.75 (33% upside)

Strong 4Q, net profits up 25%. 4Q revenue increased 13% yoy to S$58.3m driven by both Hospital and Healthcare services division, 8% above our expectations. 4Q EBIT margins expanded by 1.1ppt yoy and 1.6ppt qoq on slower growth in staff costs (+12%), other operating expenses (+3%) and lower depreciation (-3%). Consequently, net profit grew a strong 25% yoy to S$11.9m, above streets’ estimates (S$10.3m) and ours (S$9.6m). Net profit for FY09 ended at S$37.9m, a strong 20% growth in a year of recession. A 2 Scts final dividend was proposed, bringing FY09 total dividend to 3 Scts (FY08: 2.5 Scts).

Higher patient load, 4 new clinics in FY10. Management attributed revenue growth to a pick up in patient load as the economy climbs out of recession and fears of H1N1 fade. 4Q growth was stronger than expected and management projects momentum to continue. 4 new clinics will be opened in FY10F, adding to its existing network of 71 clinics in Singapore.

$50m net cash in kitty. The Group has cash holding of S$74.4m or S$50m (9.6 Scts/share) on a net cash basis. We project that the net cash will balloon further to S$90m (17.3 Scents/share) by end FY10. If the funds are not deployed, there is a high potential for special dividends, in our view. Assuming it retains S$50m net cash, this would avail up to S$40m for dividend distribution, equating to c.7.7 Scts/share.

Strong growth ahead; Upgrade to Buy, TP: S$1.75. The growth trend should continue, and with operating leverage, we raised earnings by 17%/24% for FY10F/FY11F. TP raised to S$1.75 pegged at 20x (historical mean) on FY10F EPS. Buy for its: (i) proven track record; (ii) improving operations; and, (iii) strong growth (15.6x PE, PEG 0.75x<1x). Catalyst could come from acquisitions or special dividends given its high cash level.

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